The Economic System

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Section 1: The Economic System at Work

Countries form many types of economic systems to meet their citizens' needs and wants. The United States has a market economy.

Reading Focus

• How do different economic systems help satisfy people's needs?

• What factors shape life in a market economy?

• What is the U.S economic system like?

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The Main Idea

Economic Freedoms in the U.S. Market Economy

• Freedom to buy and sell—government role is limited

• Freedom to compete—producers make what they think the consumer will buy

• Freedom to earn a living—citizens free to seek the best jobs they can get

• Freedom to earn a profit—the profit motive is essential to the system

• Freedom to own property—private ownership makes the free market possible

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The laws of supply and demand state:

• The balance of supply and demand determines the prices and quantities of goods and services.

• Law of supply—businesses will provide more products when they can sell them at higher prices

• Law of demand—buyers will demand more products when they can buy them at lower prices

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The free enterprise system and big businesses:

• Free enterprise system—freedom to compete without government interference allows the opportunity to enjoy success and profit

• Businesses run risks and must accept losses.

• Monopolies harm a free economy by eliminating competition.

• Some goods are produced more efficiently by big businesses due to economies of scale.

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Question: In what ways can big business help and hurt the free-enterprise system?

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Question: In what ways can big business help and hurt the free-enterprise system?

Helps the System

• employs many people

• produces goods more efficiently

Harms the System

• monopolies

• mergers

• trusts

• unfair competition

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Section 2: Business Organizations

American businesses may be organized as sole proprietorships, partnerships, corporations, or nonprofit organizations.

Reading Focus

• What are the different types of business organizations?

• How do corporations function?

• What is a nonprofit organization?

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The Main Idea

Different types of business organizations:

• Sole proprietorships—small businesses owned by one person; owners keep all profits but supply capital, hire help, and pay taxes; solely responsible for losses

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Different types of business organizations:

• Partnerships—two or more people share responsibilities, costs, profits, and losses; often more successful than sole proprietorships

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Different types of business organizations:

• Corporations—permanent organizations; most common form for large companies

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Features of a Corporation

• Raise money by selling stocks

• Shareholders receive a portion of the profits in relation to their holdings.

• States issue charters of incorporation, and corporation obeys regulations.

• Stockholders elect directors and vote on changes.

• Board of directors selects corporate officers.

• No one is responsible for a corporation's debt if it fails.

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Differences between preferred stock and common stock:

• Preferred stock—less risky; dividends guaranteed if company is profitable; stockholders do not usually vote in company's affairs

• Common stock—more risky; dividends only when company is very profitable; benefits include possibility of higher dividends, increased stock value, and voting on company's affairs

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Question: What are the five most important features of a corporation?

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Question: What are the five most important features of a corporation?

The Most Important Features of a Corporation

• raising money

• securing the rights to operate

• meeting debt responsibilities

• electing directors

• choosing executives

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Section 3: Making Business Decisions

Business owners must make decisions about their use of natural resources, capital, labor, and entrepreneurship. Business owners are free to make these decisions with little interference from the government.

Reading Focus

• What are the four factors of production?

• What is the government's role in the economy?

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The Main Idea

The four factors of production are necessary for the success of business:

• Natural resources—provide physical space and raw materials for business

• Capital—the money needed to start a business

• Labor—the human effort required for the business

• Entrepreneurship—initiative, decisions, risks, and management involved in a business

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How government regulates business:

• Protects small businesses from big corporations (monopolies)

• Protects workers' health and safety

• Prevents pollution

• Protects consumers from harmful products and practices

• Ensures equal opportunity employment

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Question: What are the four factors of production?

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Question: What are the four factors of production?

Factors of Production

• natural resources

• capital

• labor

• entrepreneurship

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• How do the laws of supply and demand affect the prices of products?

• What is the free-enterprise system, and what roles do big businesses play in it?

• What are the major characteristics of corporations, and what are their benefits?

• What are the advantages and disadvantages of preferred stock and common stock?

• How are stocks and corporate bonds similar and different?

• What role does the government play in the U.S. economy?

• Why must the factors of production be considered when starting a new business?

Chapter 17 Wrap-Up

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Wrap-Up